Logomasini: A CARE-less Rush to Regulate Alcohol
A CARE-less Rush to Regulate Alcohol:
Wholesalers Attempt to Secure Regulatory Fiefdoms
By Angela LogomasiniExecutive Summary
As Constitution framer James Madison warned, special-interest politics never cease. “The latent causes of factions,” he said, are “sown in the nature of man.” Without measures to control them, overbearing majoritiesor politically connected minorities would trample the rights of everyone else—taking property and destroying prosperity. The key was to set up a system of checks and balances to keep factions—today known as specialinterests—under control. Recent efforts by beer, wine, and spirit wholesalers show that Madison’s concerns remainrelevant today.Wholesalers have a long history of leveraging their position within the industry, employing state lawsto secure a guaranteed slice of the market. However, recent court cases have challenged some of these anti-competitive state laws. Accordingly, the wholesalers’ Washington, D.C., lobbyists are turning to Congress to passfederal legislation that undermines the free market and constitutional principles in order to serve their narrowspecial interest. Their effort is embodied in a bill offered by Rep. Jason Chaffetz (R-UT), the Community AlcoholRegulatory Effectiveness (CARE) Act (H.R. 1161).At the heart of this debate is wholesalers’ desire to maintain a government-enforced three-tier system for distributing alcoholic beverages. This system, present in nearly all states, requires alcohol producers—wineries,distillers, brewers—and importers to sell only to wholesalers, who in turn are the only source from which retailersmay purchase their inventory. Most states—with notable exceptions such as California and Washington, D.C.— also ban “vertical integration,” preventing any single company from owning and operating businesses in more thanone tier.In many states, franchise laws—which depend on a three-tier system—also play a big role in alcoholdistribution. Once a producer selects a wholesaler, it must abide by terms and conditions set in state franchise lawsthat grant legal and competitive advantages to wholesalers. Most franchise laws are written to make it extremelydifﬁcult and expensive for a producer to terminate the agreement. Many also require “brand exclusivity,” which prevents producers from hiring more than one ﬁrm within a designated area—either a state or local region—tocompete in ﬁnding retail buyers for a product. Legally enforced brand monopolies and the inability to terminate
contracts for non-performance make it extremely difﬁcult for small-scale wineries, breweries, and distilleriesto get their products to retailers, because wholesalers have little desire to market specialty products. These producers must focus on selling their products via their tasting rooms, direct-to-consumer shipping, or both,where it is allowed.